Thursday, February 28, 2013

Window Dressing

Depending on how you look at it, yesterday's stunning rally was either a trick or a treat . I think it was both.

I did not think the S&P would get as high as it did. Nor did I think the Dow would reach a new high.

Instead, I salute whomever mentioned Window Dressing yesterday because I totally forgot about it. It was a masterful performance.

And I overlooked the fact that open interest on S&P weekly options showed a Max Pain of roughly 1515 for this Friday's expiration. All those juicy puts that were worth about $20-30 on Tuesday are now worth about $2. It must be great to be on the inside, have access to virtually unlimited capital, and see all that order flow. To those people, it's all a big game.

I did a bunch of things yesterday: I bid for SPY calls when I should have taken the offer. Then I waited for set ups and did nothing, then bought VIX 19 calls, then bought way OTM OEX puts, the 665s. I did this against junk inventory -- SPY 153 calls -- that was left for dead. It still is, but at least it became something to hedge against.

Now I have a piece of both sides with differing time values. Most important: my total risk is quantified. Last night I slept like a baby. This morning I was up before the alarm clock.

In my opinion, the market is fracturing before our eyes. Even with new highs yesterday, and possible all-time highs close by, the Dow looks ready to fall apart.

If today the S&P gets above 1525.84, it will likely follow the Dow to a fresh high. I doubt this. I think, as in 2000 when the Dow, Nasdaq, and S&P hit their respective highs months apart, the same may be occurring now.

The pattern on the S&P suggests a possible continuation of its correction with another a-b-c to follow. This would mean an a-wave that targets below 1485 today or tomorrow. A b-wave bounce would be followed by a final decline in a c-wave targeting 1450-1470.

So with 1524.85 so close by as a stop, the cheap VIX and OEX purchases were a no brainer.

Futures have held up overnight, so there may still be some latent buying pressure. I'll be trying to hedge yesterday's bets with SPY 152 calls today but would rather not have to.

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